simple moving average
Simple Moving Average is the average price of a stock over a set number of days, recalculated daily to smooth out the noise and show the real trend.
In plain English
Here is the strange part. A simple moving average looks backwards, only backwards, and yet traders use it every single day to guess what happens next.
It sounds a bit foolish when you say it plainly. You take the last 50 days of a stock's closing prices, add them up, divide by 50, and that number becomes your guide for tomorrow's decision. Nothing about tomorrow went into that calculation. Yet somehow it works often enough that almost every serious investor keeps one on their chart.
The trick is that a single day's price jumps around too much to trust. Say you are watching MTN Nigeria on the NGX. One day it closes at ₦220, the next at ₦235 because of a rumour, then ₦210 because someone panicked. Looking at any one of those days tells you very little. But average the last 20 closing prices together and you get a smoother line that shows whether MTN is actually climbing, actually falling, or just jittery and going nowhere.
In London, a trader watching Tesco shares does the same thing, plotting a 50 day average against a 200 day average. When the short line crosses above the long line, some people call it a golden cross and get excited. When it crosses below, they call it a death cross and get nervous. The names are dramatic. The maths behind them is just addition and division.
A Nigerian in Manchester sending money home might not trade stocks at all, but the same idea calmly runs in the background of the mutual fund or pension pot holding their savings. Fund managers use moving averages to decide when a trend has genuinely turned, more than wobbled for a day.
It will never predict the future with certainty. It only tells you, calmly, what has actually been happening, which turns out to be more useful than most people expect.
Access Bank's daily closes for ten days: ₦19, ₦20, ₦18, ₦21, ₦22, ₦20, ₦23, ₦24, ₦22, ₦25. Add them up to get ₦214, divide by 10, and the 10 day simple moving average is ₦21.40, a steadier line than any single day's price.
Questions people ask
What counts as a good number of days for a simple moving average?
There is no single correct number. Short term traders often watch 20 days to catch quick moves, while longer term investors prefer 50 or 200 days to see the bigger trend. Pick a period that matches how often you actually plan to act on it.
Is a simple moving average the same as an exponential moving average?
No. A simple moving average treats every day in the period equally, while an exponential moving average gives more weight to recent prices, so it reacts faster to new information. Both smooth the price, just at different speeds.
Can a simple moving average actually predict when a stock will rise or fall?
Not on its own. It describes where the price has been, not where it is guaranteed to go. Most experienced investors use it alongside other information, like company earnings or overall market mood, rather than trusting it alone.
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